NEW YORK (FMD Capital Management) -- Often I am asked by clients what the best options are to choose in their 401(k) when they are limited to a small subset of mutual funds.
They want to participate in a similar investment strategy as the exchange-traded funds that we have selected for them, but don't want to be saddled with the high fees and limited transparency that traditional mutual funds impose.
The bad news is that you don't have a choice. You are going to have to deal with the restrictions that your 401(k) provider has chosen as part of their guidelines.
The good news is that you can still implement a similar asset allocation strategy and steer your portfolio towards areas that mimic low-cost ETFs. Even though a 401(k) is more restrictive, it is still a vastly better retirement savings vehicle than a taxable account.
The first step towards positioning your employer-sponsored retirement account for success is determining what your asset allocation will look like. Everyone will likely have a different split between equities and bonds based on their risk tolerance, time horizon and a host of other factors.
My only recommendation in this area is to strategize on a longer timeline than you would a more liquid investment account. People often think that they can time the market with their 401(k) and are surprised to find that the number of trades in a year is limited or the funds may impose penalties for short-term redemptions. You want to be conscious of your penalty fees and trading restrictions.
Once you have your asset allocation targets, you should screen the list of available funds for passive index strategies. Often times these will have similar names to major stock indices such as: S&P 500, Midcap 400, Russell 2000, or International EAFE index. These funds are going to be excellent core holdings that will most likely have the fewest limitations and lowest management fees when compared to their actively managed peers. You will also be able to find out exactly what the underlying stocks are because they are based on well-established indexes that don't change frequently.